Esbm8 Ppt04 Notes

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Chapter 4 Franchising Copyright 2006 Prentice Hall Publishing Company 1

Franchising and the

Entrepreneur




The Franchising

Boom!!! Sales exceeding $1 trillion from virtually

every product or service imaginable.

One out of 12 retail businesses in theU.S. is a franchised operation.

Franchise sales account for 40% of totalretail sales.

A new franchise opens somewhere inthe world every six-and-a-half minutesand in the United States every eightminutes.




274,265

290,605

310,044

341,579 337,693351,459

-

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

N u

m b e r o f F r a n c h i s e d U n i t s ( i n

T h o u s a n d s

)

2000 2001 2002 2003 2004 2005

Year

Franchising Grow th

Number of Units (in Thousands)




Franchising

Franchising – semi-independent businessowners pay fees and royalties to a parent

company in exchange for the right to sell itsproducts and services under the franchiser’strade name and often to use its businessformat and system.




Types of Franchising

Tradename

Product distribution

Pure (Business format)




Why Buy a Franchise?

Franchisees benefit from the franchiser’sexperience.

Franchisees get a proven business system andavoid having to learn by trial-and-error.

Franchisees earn a great deal of satisfactionfrom their work.

Before buying, ask: “What can a franchise dofor me that I cannot do for myself?”


http://slidepdf.com/reader/full/esbm8-ppt04-notes 7/37Chapter 4 Franchising Copyright 2006 Prentice Hall Publishing Company 7

Benefits of Franchising

Business system

Management training and support

Brand name appeal

Standardized quality of goods andservices

National advertising program



Benefits of Franchising

Financial assistance

Proven products and business

formats Centralized buying power

Site selection and territorial

protection

Greater chance for success



Drawbacks of Franchising

Franchise fees and profit sharing

Strict adherence to standardized

operations Restrictions on purchasing

Limited product line

Unsatisfactory training programs Market saturation

Less freedom



Drawbacks of Franchising

Limited product line

Unsatisfactory training programs

Market saturation

Less freedom



Ten Myths of Franchising

1. Franchising is the safest way to gointo business because franchises

never fail.2. I’ll be able to open my franchise for

less money than the franchiser

estimates.3. The bigger the franchise organization,

the more successful I’ll be.




4. I’ll use 80 percent of the franchiser’sbusiness system, but I’ll improve

upon it by substituting myexperience and know-how.

5. All franchises are the same.

6.

I don’t have to be a “hands-on” manager. I can be an absenteeowner and be very successful.




7. Anyone can be a satisfied, successfulfranchise owner.

8. Franchising is the cheapest way to getinto business for yourself.

9. The franchiser will solve my business

problems for me; after all, that’s why Ipay an on-going royalty.

10. Once I open my franchise, I’ll be ableto run things the way I want to.



What Do Franchisers Look

for in a Franchisee? Experienced?

Hard Working?

Team Player? Leadership & Management Skills?

Risk Averse?

Educated? Financially Stable?

A Desire to Succeed?

Yes No Maybe



Experienced?

Hard Working?


Risk Averse?



Yes No Maybe


for in a Franchisee?



Experienced?

Hard Working?


Risk Averse?



Yes No Maybe






Franchising and the Law

Key protection is the Uniform FranchiseOffering Circular (UFOC).

Franchisers must deliver a copy of UFOC before any offer or sale of afranchise.




Franchising and the Law

The UFOC contains information on 23topics, including:

Franchiser’s business experience Franchise fees and costs

Lawsuits involving the franchiser

Financial assistance available Territorial protection granted

Restrictions on purchasing




Detecting Dishonest

Franchisers Claims that the contract is “standard;

no need to read it.”

Failure to provide a copy of therequired disclosure documents.

Marginally successful prototype or noprototype.

Poorly prepared operations manual.

Unsolicited testimonial from “a highlysuccessful franchisee.”




Unusual amount of litigation byfranchisees.

Promises of future earnings with nodocumentation.

High franchisee turnover or terminationrate.

Attempts to discourage your attorneyfrom evaluating the contract beforesigning it.

(Continued)

Detecting Dishonest

Franchisers




No written documentation. High pressure sale. Claims to be exempt from federal

disclosure laws. "Get rich quick" schemes, promising

huge profits with minimal effort. Reluctance to provide a list of existing

franchisees. Evasive, vague answers to your

questions.

Detecting Dishonest

Franchisers(Continued)




How to Buy a Franchise

Preparation, common sense, and patienceare vital ingredients in choosing the rightfranchise.

Evaluate yourself - What do you like anddislike?

Research the market.

Consider your franchise options. Get a copy of the franchiser’s Uniform

Franchise Offering Circular (UFOC) andstudy it.




What Should You Look

For? A unique concept or marketing

approach

Profitability

A registered trademark




What Should You Look

For? A business system that

works

A solid training program

Affordability

A positive relationship

with franchisees

(Continued)




How to Buy a Franchise

Talk to existing franchisees.

Ask the franchiser some tough

questions.

Make your choice.

(Continued)



Table 4.4 Advantages and Disadvantages of Buying a New vs.

an Established Franchise

Pros Cons

New

Franchise

Can be new and exciting

Business concept can be fresh and

different in the market

Possibility of getting lower fees as

a “pioneer” of the concept

Potential for a high return oninvestment

Business is not tested or

established in the market

Unknown brand and trademark

Possibility that the concept is a fad

with no staying power

Franchiser may lack theexperience to deliver valuable

services to franchisees

Established

Franchise

Business concept likely is well-

known to consumers and market for

the products or services is already

established.Franchiser has experience in

delivering services to franchisees

Franchiser has had time to work

the “bugs” out of the business

system

High franchise fees and costs that

often are non-negotiable

Concept may be on the wane in the

marketFranchiser’s brand and trademark

may remind customers of an

outdated concept

Franchiser’s “trade dress” may be

in need of updating and redesigning

Source: Based on Andrew A. Caffey, “Age Issues,” Entrepreneur , January 2002. p. 118.




Franchise Contracts

Note clauses covering:

Termination Renewal

Transfers and Buybacks

40% of New Franchisees Sign

Contracts Without Reading

Them !!!

Contract




Three major Growth

waves 1970s : Fast food industry

1980s : services

1990s – today: low-cost franchisesfocus on specific market niches




Trends Shaping

Franchising International opportunities

Smaller, nontraditional locations

Conversion franchising




Trends Shaping

Franchising Multiple-unit franchising

Master franchising

Piggybacking (Combinationfranchising)

Serving aging baby boomers



Franchising Web Sites

Entrepreneur’s Franchise Zonehttp://www.entrepreneur.com/Franchi

se_Zone/FZ_FrontDoor/0,4670,,00.html

Subway Sandwiches and Salads

http://www.subway.com/ Auntie Anne’s Pretzels

http://www.auntieannes.com/

http://www.entrepreneur.com/Franchise_Zone/FZ_FrontDoor/0,4670,,00.html



http://www.subway.com/



http://www.subway.com/




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